The paper develops a model to analyze the effect of openness on the behaviour of firms in a developing country.

The specificity of the model is to introduce heterogeneity among firms, which is based on the lack of access to capital markets. We suppose that the costs related to the financing of investment are high – either because interest rates are high, or because of credit constraints. This leads us to model the coexistence in developing countries of two types of firms: some have chosen to invest in fixed costs and produce with low marginal costs, other produce with zero fixed costs and have correspondingly high marginal costs.

In this theoretical framework, we find that trade reform can encourage firms to invest only if liberalization of tariffs covers intermediate goods, or if the liberalization of tariffs is symmetrical – in other words if it is coupled with an equivalent opening up of export markets for developing countries.

In the case of an asymmetrical liberalisation which concerns both intermediate goods and final goods, the model shows that we can not be assured that firms will invest and thus improve their productivity.

The theoretical backdrop together with empirical results of the effect of a lowering of tariffs on the incentive to invest, provides a better understanding of the possible adjustment processes taking place in the Mediterranean countries. From the point of view of economic policy, this theoretical model has the merit of showing that the Mediterranean countries should not rely solely on the dismantling of tariffs envisaged in the Euro-Mediterranean Association Agreements to boost their productive system. In contrast, our results show that without accompanying reform and especially without making radical changes to the conditions of access to finance, especially for small and medium sized enterprises, trade reform could be an impediment to the development and growth of industry.